Subrogation

Suppose another car runs into yours, and the other driver is at fault.

In principle you could sue that driver. In practice that takes years, and meanwhile your car is off the road.

So insurance offers a shortcut. Your own insurer pays your claim first. Then it takes over your right to go after the other driver.

That handover is subrogation. The insurer steps into the shoes of the insured person and takes all the actions the insured person could have taken.

Both sides gain. You get paid quickly, without waiting for the case against the other driver to finish. The insurer gets a chance to recover what it paid out.

And there is a third effect, which the workbook spells out. A policy without subrogation rights for the insurer would be more expensive for the insured person.

The definition. Subrogation means the insurance company steps into the shoes of the insured person after paying the claim, and takes all the actions the insured person could have taken.

The sequence, in the workbook's own example. The insured suffers a loss in an accident caused by another car that was at fault.

1. The insurance company pays the claim to the insured person.
2. It then steps into the shoes of the insured person.
3. It pursues the claim with the at-fault driver, or with her insurance company.
4. It recovers the loss from them.

Note the order. Payment comes first. The insurer acquires the right by paying, not by promising to pay.

What each side gets out of it. The insurance company gets a chance to reduce or recover its losses. The insured person gets her claim from her own insurance company faster, without waiting to complete the process of enforcing her right against third parties.

And what it does to the premium. A policy without subrogation rights for the insurer would be more expensive for the insured person. The recoveries the insurer expects to make are priced into what it charges.

Where it sits. Subrogation is item (c) in section 1.4, Concepts in Insurance, between benefit insurance at (b) and contribution at (d). Note what the workbook restricts and what it does not. It says expressly that the concept of contribution is applicable only to indemnity policies, because the loss amount is ascertainable and the total claim cannot exceed the ascertained loss. It makes no such express restriction for subrogation. What it does give is the shape of the mechanism, which needs a third party at fault and a loss the insurer has made good.

The workbook gives no figure for subrogation. Section 1.4(c) states no percentage, no recovery limit and no time limit. The rupee figures that appear a few lines later - two flood policies of Rs 5 lakh each, an ascertained loss of Rs 30,000, and a Rs 15,000 apportionment - belong to contribution, the next concept in the same section, and not to subrogation.

The workbook gives no figures for subrogation; the amounts below are illustrative, built on its own at-fault-driver example.

Mrs Pillai's car is hit by a delivery van in Kochi. The van driver is at fault. Repairs cost Rs 2,80,000.

Mrs Pillai was paid in weeks. She never had to file a case, engage a lawyer or wait for the van driver's liability to be established.

What she cannot do. Having been paid Rs 2,75,000 by her insurer, she cannot separately recover the same Rs 2,75,000 from the van driver and keep both. That right now belongs to her insurer. Recovering twice would turn the accident into a profit, which is what the principle of indemnity forbids.

And what the absence of the right would cost her. If her policy had barred the insurer from recovering from the van driver, the insurer's net cost would have stayed at the full Rs 2,75,000 instead of Rs 35,000. The workbook's point is that such a policy would simply carry a higher premium.

Chapter 1 (Basics of Insurance), section 1.4(c), defines subrogation with the at-fault-driver example, states the benefit to both parties, and closes with the line that a policy without subrogation rights would be more expensive for the insured. It sits between benefit insurance at (b) and contribution at (d). Expect a definition question, a question on the order of events - the insurer pays first, then recovers - and a question pairing subrogation with contribution and asking which applies when two policies cover the same risk.

• Subrogation and contribution are different mechanics. Subrogation is the insurer recovering from a third party at fault. Contribution is one insurer claiming a proportionate share from another insurer covering the same risk. Questions put them in the same list on purpose.
• The insurer pays first. Subrogation is not a reason to delay a claim while the insurer chases the at-fault party.
• The insured cannot recover twice. Once paid, the right to pursue the third party has passed to the insurer.
• A policy without subrogation rights is more expensive, not cheaper. Candidates get this backwards, reasoning that giving up a right should cost less. The insured is giving the right away, and the insurer prices the lost recoveries in.
• The only-indemnity restriction is stated for contribution, not for subrogation. Section 1.4(d) says contribution applies only to indemnity policies. Section 1.4(c) says nothing of the kind about subrogation, so do not assert the limit as though the workbook had.
• The Rs 5 lakh, Rs 30,000 and Rs 15,000 figures in the same section are the contribution example, not a subrogation example. The workbook attaches no figure to subrogation at all.